In an electronic exchange buyers and sellers set prices for items to be purchased or sold. Exchanges have a mechanism that matches up buyers and sellers and establishes a market-clearing price for the item being bought or sold. Buyers buy the product at the market price and sellers sell the product at the market price. The market-clearing price is dynamic and set by market supply and demand conditions. The price is influenced by dynamic negotiations among buyers and sellers and other market conditions.
Exchanges today facilitate trade by enabling buyers, sellers, and other trade participants, who could otherwise not have participated in the trades, to take part in the trade. This is done by providing market liquidity where buyers can find sellers and sellers can find buyers. In addition, a common information base is provided so that sellers and buyers can understand each other, by providing settlement and fulfillment services that the trading partners can use to consummate the deal.
In several electronic exchanges, aggregation is used to group buyers with similar buying interest or sellers with similar selling interests to enable them to participate in trades in which they would not have qualified to participate in individual capacity. For instance, a buyer requiring 5 pounds of sugar may not be able to participate if all the sellers in the sugar exchange sell a only a minimum of 1000 pounds. Aggregating buyers or sellers on these exchanges gives the aggregated or “virtual” buyer or seller greater leverage in negotiating with the other parties and thus establishing prices more favorable to the aggregated virtual party. Thus, aggregation allows buyers or sellers who may otherwise not have participated in the trade to participate in the trade on terms favorable to them and thus creates value for the aggregated set of trading partners.
Several exchanges today allow many trading partners to participate in a single trade where each trading party participates in one aspect of the trade. Each aspect of such a trade is called a trading element. A trading element can be a product or a service either consumed by or provided by a trading partner. Thus a buyer can participate in a trade that includes one or more products or services (trading elements) and each trading partner might buy or sell one of the many trading elements in the product. For example, a trade of buying books over the internet involves 3 trading elements:    1. the book itself, provided by the online bookstore,    2. the shipping service from the shipping company, and    3. the sales tax component charged for a service delivered by the local or the state government.
This model can easily be extended to include other trading elements, such as the publisher, resellers, author etc. that could potentially participate directly or indirectly in the trade.
Revenue Models
All Electronic trading systems require a revenue model by which trading partners and the electronic exchange or the trading system generate revenues and profits. Providers of electronic trading systems generate their revenue from a number of revenue streams.
Current Revenue Models: In today's electronic commerce systems revenue generated is based on commerce, content, collaboration, and services.
Commerce-Based Revenue Models:
    1. Transaction Fees: A percentage of the transaction is charged as a fee. Fees usually range from 0.5% of the transaction to 8% on more complex transactions. Most of the exchanges settle in the 1–2% commission range for catalog orders. Some exchanges charges flat fees for processing transactions−$1.00 for a purchase order. They may have additional charges for different types of fees (invoice, payment, shipping document, bill presentment, and cash transfer).    2. Auction Services: Auction services also charge (though higher, typically) a percentage of the auction transaction as fees. Typical exchanges charge 3% but the fees are headed down as auctions become commonplace. Commerce One offers auction services at a 1% service fee.    3. Mark up—Some exchanges take the title to goods and mark up the goods to what the market will bear. Here the markup typically ranges from 5–10%. The risk in this revenue model is that the margin for the exchange is dependent on product pricing.    4. Membership/Storefront fees—are charges to a merchant to list its catalog and promotional material in a segmented storefront in the exchange. These fees range from zero to a few thousand dollars. This is similar to personal web-page hosting. Some exchanges use this model by selling a member-supplier a separate segment in the marketplace to post its wares.    5. License Fees—Some exchanges develop proprietary software for use at the buyer's and seller's site, and charge for this.Content-Based Revenue Model:
In a content-based revenue model, revenue may come from advertising fees, catalog fees, or fees for collecting statistics about aspects of market behavior. The advertising model is similar to the business-to-consumer (B2C) space where topic-specific or general advertisements are hosted and fees charged may be based on click-through or similar concepts. In the catalog world, service charges are applied for hosting, maintaining and cleaning up product catalogs for trading partners (such as buyers, sellers or facilitators). Another dimension of the revenue comes from obtaining and selling important statistics about different aspects of market behavior.
Collaboration Revenue:
Here the exchange allows different trading partners to collaborate as part of the trading process. The exchange could charge for the coordination of this and for managing the workflow between members of the demand and supply chain.
Third-Party Services:
Exchanges could host or sell other third party goods and services and charge for those. The branding and reputation of the exchanges could make this attractive.
Start-up Costs:
Exchange start-up costs may run into a few million dollars. Outsourcing the infrastructure to existing exchanges (Such as Ariba or CommerceOne) which have built- in capabilities generates revenue for these exchanges. However, startup costs are falling as more standardized software becomes available.
In summary, the current trading systems and exchanges enhance trade by aggregating trading partners and by allowing trading partners supporting or interested in different trading elements of the trade to participate simultaneously in the trade. However, they do not have a facility for enabling trading partners to define how they value the different trading elements based upon their attributes.
Neither do theses trading exchanges have a system that settles trades in such a way that the trading partners participate at a price at least as good as the value they attach to the different trading elements. Trading systems or exchanges generate revenue in a static manner mainly for enabling trade or other services at the exchange. The system makes revenue whether or not the trade was a good deal for the trading partners. This model gives the trading systems operators an incentive to increase transaction quantity at the expense of quality. The actual commission charged is often disputed by or negotiated with buyers or sellers and is vulnerable to competitive undercutting.
The presence of a commission based on transaction volume also gives buyers and sellers a perverse incentive to close the deal outside the trading system. The revenue model thus adversely affects customer loyalty towards the trading system. The current revenue model thus is a less than ideal model for trading partners and trading system providers.
What is desired is a trading system that enables trading partners to define how they value the different trading elements based upon their attributes. A trading system that is sensitive to value placed on each trading element by trading partners is desired. A revenue model for the exchange that is not based on fixed transaction fees or commissions is desired.